A famous saying goes, “To err is human.” Though it is inevitable, committing mistakes in the compliance process can cost a business heavily.
A compliance mistake is an act or omission that violates a law, regulation, policy, or standard. IT leaders, compliance officers, and board members are always concerned about avoiding compliance mistakes. Financial penalties, legal action, loss of reputation, and customer trust are some consequences that companies may face due to non-compliance.
Organizations need to be aware of compliance mistakes to prevent such mishaps. To help you understand the gravity of the situation, we have listed 9 common compliance mistakes and provided tips on how to avoid them.
9 Common Compliance Mistakes and How Businesses Can Avoid Them
1. Neglecting to Conduct Regular Risk Assessments
Potential risks and vulnerabilities in a process or system, such as outdated software, policies, and inadequate security measures, are a significant concern for companies.
For instance, a company using old software no longer supported by the vendor could face severe security risks. Similarly, not having proper data backup procedures in place can lead to the loss of critical information. Other risks include data breaches, non-compliance with regulations, and failure to meet customer expectations.
According to Verizon’s recent report, businesses that suffer data loss of around 100 lost or compromised records can incur an average cost of $18,120 to $35,730. With such high costs, neglecting regular risk assessments can harm a company’s finances and reputation.
How do we avoid the neglect of conducting regular risk assessments?
The best practice is to conduct regular risk assessments at least once a year or when significant changes in the company’s operations occur. The risk assessment should identify potential risks, assess their impact and likelihood, and provide recommendations to mitigate or eliminate them. Also, involving all departments and stakeholders in the risk assessment can help identify risks from different perspectives.
2. Internal Compliance Audits are Not Taken Seriously
Internal compliance audits assess a company’s compliance with laws, regulations, and policies. However, many companies do not take these audits seriously and see them as mere formalities.
Internal audits help identify weaknesses in the organization’s compliance program. For instance, during an audit, a company may discover that employees are not trained on regulations relevant to their job functions. Such a finding can lead to penalties and non-compliance issues in the future.
A one-off event or lack of resources should not be an excuse for neglecting internal audits. Financial penalties due to non-compliance can far outweigh the cost of conducting regular internal audits.
How do we ensure internal compliance audits are taken seriously?
Companies should prioritize internal audits and allocate enough resources for their completion. Internal auditors should have the necessary qualifications and expertise and be independent of the department or processes being audited.
Management should also document and review the audit findings, and corrective actions should be implemented promptly.
3. Employee Classifications are Inaccurate
Employees can be classified as full-time, part-time, contract, or temporary, and each has different legal implications. Misclassifying employees leads to issues with tax payments, employee benefits, and compliance with labor laws.
For example, a company may classify an employee as an independent contractor to save on taxes and benefits. However, if the classification does not meet the legal criteria for an independent contractor, the company may face penalties for tax evasion and non-compliance with labor laws.
The output of misclassifying employees can be catastrophic, including fines and legal action from both the government and the affected employee. Productivity and employee morale may also be affected if employees feel their rights are violated.
How can companies ensure accurate employee classifications?
Companies must clearly understand the legal criteria for employee classification and review them periodically to ensure compliance. Consulting with legal advisors helps companies make informed decisions about employee classifications.
Additionally, companies should maintain accurate records of employee classifications, job duties, and contracts to support their classification decisions. Regular training for HR personnel on labor laws and regulations can also prevent misclassification.
4. Not Following Proper Documentation Procedures
Proper documentation of policies, procedures, and processes is essential for compliance. Yet many companies fail to document new or changed policies and procedures, leading to non-compliance.
An example is the General Data Protection Regulation (GDPR) in Europe, which requires companies to document their data processing activities, obtain consent from individuals, and have a data protection officer. Failure to comply with GDPR’s documentation requirements can result in significant fines.
In addition to compliance, if the organization’s culture is to document all processes and procedures, it becomes easier to identify areas for improvement and implement changes. New employees can refer to documented procedures for guidance, reducing training time and errors.
How do we ensure proper documentation procedures are followed?
Companies must have a centralized system for managing and updating every policy, procedure, and process. Regular reviews of existing documentation and updates in line with changes in laws or regulations are critical.
Proper employee training on the importance of documentation and how to document correctly promotes a culture of compliance within the organization. As an additional measure, companies can also appoint a documentation officer to oversee and ensure proper documentation procedures are followed.
Overall, having a systematic approach to document management helps in compliance and promotes transparency within the organization.
5. Failure to Implement Compliance During Mergers and Acquisitions
Mergers and acquisitions (M&A) involve combining two or more companies, and this process can pose compliance risks if not handled properly. The acquiring company may inherit non-compliance issues from the acquired company, leading to legal consequences.
For example, suppose the acquired company was involved in a data breach that was not reported or addressed correctly. In that case, the acquiring company may face penalties for non-compliance with data protection laws.
Compliance issues are one of the main reasons for M&A failures. The lack of proper due diligence and failure to integrate compliance into the M&A process can lead to significant risks for both companies. If not addressed, these risks can have a long-term impact on the company’s reputation and financial stability.
How can companies ensure compliance during M&A?
Companies must conduct thorough due diligence on potential merger or acquisition targets to identify compliance issues. This includes reviewing the target company’s policies, procedures, and past compliance records.
Integrating compliance into the M&A process from the start can also help avoid non-compliance issues in the future. Companies should have a comprehensive plan for integrating processes, systems, and employees to ensure compliance with all relevant laws and regulations. Additionally, regular audits and training can help identify and address compliance gaps in the newly merged company.
6. Lack of Transparency in Financial Reporting
A company’s stakeholders, including investors, shareholders, and regulators, rely on accurate financial reporting to make informed decisions. However, some companies may manipulate their financial statements to show higher profits or hide losses.
Major accounting scandals like Enron and WorldCom have shown the devastating consequences of fraudulent financial reporting. Companies can face lawsuits, fines, and even bankruptcy if caught falsifying their financial statements.
A lack of transparency in financial reporting also erodes stakeholders’ trust and can have a negative impact on the company’s reputation and stock value. The repercussions of such actions can be long-lasting and difficult to recover from.
How can companies ensure transparency in financial reporting?
A systematic approach to financial reporting, including proper internal controls and regular audits, helps identify discrepancies or errors in financial statements. Companies should also have a code of conduct that promotes ethical behavior and prohibits fraudulent activities
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Additionally, external auditors objectively evaluate the company’s financial statements and report any irregularities. Regular communication with stakeholders regarding the company’s financial performance can promote transparency and build trust.
7. Inadequate Third-Party Due Diligence
Companies often rely on third-party vendors or suppliers to provide goods and services. However, if these vendors engage in unethical or illegal activities, the company’s compliance can have severe repercussions.
For example, suppose a company outsources its manufacturing to a supplier that uses child labor. In that case, the company may face legal consequences for violating laws and regulations on child labor. The reputational damage associated with such actions can also impact the company’s bottom line.
How can companies conduct proper third-party due diligence?
Companies should conduct thorough due diligence before engaging with third-party vendors or suppliers. This includes evaluating the vendor’s compliance history, financial stability, and ethical practices.
Contracts with third-party vendors should also include specific compliance requirements and consequences for non-compliance. Regular monitoring and audits of third-party activities help identify potential issues and promptly take corrective action.
8. Not Updating Compliance Programs Regularly
A compliance program is not a one-time task; it must be regularly updated and adapted to changes in laws, regulations, and business practices. Failure to do so can result in non-compliance and potential legal consequences.
Let’s say a company has a compliance program but fails to update it when new data protection laws are implemented. This can lead to unintentional non-compliance and penalties for the company.
In fact, many regulatory bodies require companies to have a regular review and update process for their compliance programs.
Expansion into new markets or industries requires companies to update their compliance programs to comply with all relevant laws and regulations. Failure to do so can result in non-compliance and legal consequences.
How often should companies update their compliance programs?
While there is no set rule for updating compliance programs, companies should review and update them at least once a year. However, if laws or regulations significantly change, it is essential to update the program immediately.
Regular employee training on updated compliance policies and procedures also helps ensure their understanding and adherence to the program. Additionally, regular risk assessments can help identify any potential areas of non-compliance that need to be addressed.
9. Ignoring Data Protection Laws and Regulations
Data protection laws and regulations, such as the General Data Protection Regulation (GDPR) in the European Union and the California Consumer Privacy Act (CCPA) in the United States, govern how companies collect, store, and use personal information.
Failure to comply with these laws can result in significant fines and reputational damage for companies. In fact, GDPR violations have resulted in penalties of up to €20 million or 4% of a company’s annual global turnover, whichever is higher.
Big data and technological advancements have made it easier for companies to collect and store vast amounts of personal information. However, this also means that companies must be diligent in their data privacy practices to avoid non-compliance.
How can companies comply with data protection laws?
Companies must understand and adhere to all relevant data protection laws and regulations in the regions in which they operate. This includes obtaining consent from individuals before collecting their personal information, ensuring secure data storage, and providing options for individuals to access or delete their data.
Regular audits and risk assessments help identify potential compliance gaps in a company’s data privacy practices. Companies should also have a designated person or team overseeing data protection compliance.
How to Avoid Common Compliance Mistakes by Partnering with Professionals?
Partnering with compliance professionals can help companies avoid common mistakes and comply with all applicable laws and regulations.
These professionals have the knowledge, expertise, and resources to assist companies in developing and implementing effective compliance programs. They can also provide ongoing support by conducting regular audits, risk assessments, and employee training.
SyncUpPro is a platform for companies to connect with compliance professionals and access a wide range of compliance services. Whether developing a compliance program, conducting audits, or training employees, SyncUpPro can help companies meet their compliance obligations.